Senate votes to end subsidies to ethanol industry with financial stability

Federal subsidies for corn ethanol have long been considered untouchable in Washington, not at least because politicians want the votes of Iowans, who have traditionally held the first nominating caucuses in the contest for the presidency.

In Washington, there is growing consensus that the ethanol industry has reached financial stability, and a strong majority of the Senate recently voted to end most of the subsidies.

The pressure prompted three influential senators to announce a compromise on Thursday that would drastically cut the financial support and end a tariff on foreign ethanol entirely by the end of July. The White House, which has supported a reduction of the subsidies, said it was encouraged by the latest proposal.

Three Republican presidential candidates — Tim Pawlenty, Ron Paul and Rick Santorum — are also seeking to eliminate or phase out subsidies for the industry even if that hurts them in Iowa. Jon Huntsman has decided he will not even participate in the caucuses, in large part because of his antisubsidy record.

No one is seeking to end the most important government support for ethanol — a federal mandate that gasoline blenders mix increasing amounts of ethanol into gasoline. But at a time when many tax breaks are under scrutiny, there seems to be little political will to continue giving $6 billion a year in federal tax credits to fuel blenders that must buy the ethanol anyway.

Further undermining support for ethanol are food makers and livestock farmers, who say the demand for corn is driving up their own costs, and the oil industry, which has never been fond of a fuel that displaces gasoline.

Corn ethanol production has hit record levels this year, beating government goals and creating a surplus for export. With oil prices close to $100 a barrel, fuel blenders have not needed tax credits to make ethanol economically attractive, since wholesale ethanol is cheaper than gasoline in many markets. And the renewable fuels standard has increased the required amounts of ethanol that fuel blenders must use to 7.5 billion gallons by 2012 from 4 billion gallons in 2006.

Many top ethanol producers, like Valero Energy, Archer Daniels Midland and POET, are stable and profitable as compared to the heavily indebted companies of five years ago.

Corn prices, meanwhile, have more than tripled since Congress created an ethanol mandate in 2005. The portion of the American corn crop devoted to ethanol has grown to nearly 40 percent.

"Over the last two years, the oil industry has been joined by food producers, environmentalists, as well as the poultry producers who use grain as a feed, to create a powerful coalition against ethanol subsidies," said Divya Reddy, an energy analyst for the Eurasia Group, a consulting firm.

Reflecting the new landscape, the Senate voted 73-27 in June to end the tariff on foreign ethanol and cut annual tax credits for blenders of ethanol. The vote was attached to a bill that failed, so many analysts view it as a sign that neither benefit is likely to survive this summer's negotiations regarding the national debt.

David A. Swenson, an economist at Iowa State University said in the short term, about six to nine months, there may be a minor reduction in production, but within a year or so, production is expected to climb back to where it is now due to the mandate, which guarantees demand and maintains the price level.

As for the tariff — a 54-cent-a-gallon tax on imported ethanol first imposed in 1980 — analysts say it is unnecessary now because Brazil, generally a leading source, is tightening production. Brazilian refiners make ethanol from sugar cane, but with sugar prices high on international markets, they are making less ethanol and more sweetener.

In January, the Environmental Protection Agency said cars and light trucks built since 2001 could safely use a blend with up to 15 percent ethanol, although few stations are now equipped to supply that. So the ethanol industry now wants the government to help it grow by subsidizing gas pumps.

Industry lobbyists are now supporting a proposal that would end the blender's tax credit entirely and dedicate $1.33 billion of the $2 billion in unspent money from this fiscal year's budget for deficit reduction.

The remaining $668 million would go toward tax credits for advanced biofuels and for gas stations to install special blender pumps to allow drivers to choose higher concentrations of ethanol.